The Danger of Book of Business – Part 1

Balancing “Book of Business” is one of the largest stumbling blocks for CPA firms.  It is difficult to resolve because it is symptomatic, for most firms, of some real trouble brewing.

Optimal Book Size

The optimum condition for firms to flourish is for Books of Business to be balanced throughout the firm.  From the largest book to the smallest, the percentage gap between them should be fairly small (about 20-25% or less than a couple hundred thousand in fees).  Often, the gap is small in the beginning and a non-issue.  All the partners are working hard just to get the new firm off the ground.  And while one partner’s book might be $400k, the other one’s is $300k.  In this example, the same style of client management would likely be utilized by both partners -- the partners doing most of the work on each client project and utilizing staff for the more menial tasks.

However, as firms grow, often so does the difference in book size.  If a partner wants to be very hands on with each project, then that partner will hit a natural book-size ceiling he/she can manage.  My experience says this ceiling is about $500k to $650k of work.  Some partners adopt a philosophy of “less hands on” regarding project management and gravitate more to client management.  These partners will utilize staff to do the lion’s share of the work.  These highly leveraged partners (those who delegate most of the project management to staff) can easily handle a book size of over a million, many around two million and more.

Now, just for clarity, I am not talking about the top 50 sized CPA firms with partners having a 2 million dollar client management ceiling.  In the largest CPA firms, one partner’s book size will often be significantly higher just because one client may be $50 million a year in fees.  So, while I don’t want to get too far off point, when I am referring to one partner managing a book of $2M as another natural ceiling, I am thinking of firms that have total net revenues of between $5-$10M.  These firms have little -- if any -- SEC work and a very large client is a couple hundred thousand dollars in fees per year.  The maximum book size a partner can handle is based on three components, not just one.  At some combination of number of clients, fees collected for each client (scope of projects) and number of projects, the amount of activity becomes too much for one person to stay on top of if he/she is focused on maintaining high client service and satisfaction levels.

Negative Contributions of the Small Book Partners:

(Don’t worry if this takes shots at you.  My next column will focus on how and why large book partners are causing as much, if not more, damage to the firm):

When a partner, because of his/her client service style, has a maximum work ceiling of $500k to $650k in book size, he/she is likely hurting the firm.  Why?  Many reasons come to mind!  The first is leverage –as there is little of it.  The partner in this situation typically does too much of the detail work.  Immediately, this causes a realization problem because the work does not warrant partner billing rates.  Therefore, we write down the work and complain about fee pressure when in fact it is more about misallocation of personnel on the project.

Another bi-product of this misallocation is the under development and utilization of managers because the partner is doing manager level work.  This tends to relegate managers into doing staff level work and so on down the organizational hierarchy.

One more downside anytime most of a partner’s time is committed to working on the details of projects.  Under this scenario, virtually no time is left to spend with clients trying to live up to our profession’s mantra of being “their most trusted advisor.”  It is almost impossible to be a client’s advisor if you rarely spend time finding out what is on their mind and what is important to them.  If the partner doesn’t set aside time to do this, you can guarantee no one else in the firm will.

One more negative aspect of small book ceilings is profitability.  In a $500k book, after paying staff and overhead, and once the partner’s compensation that is managing the book is factored in, there is little left to share with other partners or to grow/reinvest back into the firm.  And even in the rare cases where there is a reasonable amount of profit left, regardless of how much you grow the firm, this partner’s contribution to the bottom line will remain fairly flat.

One common complaint I get from firms with significant growth opportunity is that they are struggling to find new partners to manage the additional work.  A similar story is often told from firms with retiring partners – there is no one that wants to take on the additional client load.  The problem quoted is that all of the other partners have as much work as they can do.  For the record, this problem is all about capacity and freeing up more of it.  The starting place to build this excess capacity is to force partners into living up to their partner roles and responsibilities.

Over-served clients is another tendency of partners with small books of business.  Because they don’t have as many clients and as much work to manage as big booked partners, and because they have stacks of transactional work sitting around the office to consume their time, small booked partners tend to do more of the work themselves to stay busy.  This, in turn, teaches their clients that a $350 tax return is work worthy of a partner’s undivided attention.  Besides the low realization we already touched on, this situation creates a transition nightmare.  When the client, after being served by a prominent partner for 15 years gets handed down to a manager as their main point of contact, the client feels slighted and unappreciated.  Keeping this account is not as much about the charisma of the new person handling it as it was about the unrealistic expectation of service set by the previous partner.

Finally, at least in this rant, I want to talk about value.  First, consider that often the only difference between a $500k and a $5M firm is about 8 partners (each doing about $500-700k).  So, when a partner maxes out around $500-$600k book size, for all the reasons discussed above, little leverage of firm value is generated.  While the market is still OK today for small firms, in my opinion, it will get worse soon.  Everyone is becoming increasingly aware that a firm built around leverage is more valuable (having the partner manage the client with managers and staff doing the work).  Fewer and fewer firms will want to buy Books of Business that require partners to work 3,000 hours to bill $600k.  Fewer and fewer firms will want to buy client bases that are loyal to just one individual.  Fewer and fewer firms will want to buy operations where staffing the work at the right level will run off the clients because of an unrealistic service expectations.

Small booked partners --- it is time to grab the brass ring by moving beyond your comfort zone.  It is time to realize that you need to grow your capacity to handle clients at the rate of about $150k a year for the next 5 years to catch up to where you need to me.  It’s time to start leveraging your work, run a more profitable book of business, work less hours, and take more money home – all the while increasing the value of your firm.

For those I offended with this column, don’t worry, I will be taking shots at your big booked partners in the next issue.  And once all the dust has cleared from that discussion, I will have a foundation to provide more insight into how to go about balancing book sizes and creating a brighter more profitable future for your firm.